Treasury Department Seeks to Offer Tax-Free Investment

The U.S. Department of the Treasury is staying focused on tax-free investing for most Americans despite the controversy its original plan caused.

This week the Treasury Department scaled back its original plan to allow all Americans to invest up to $7,500 per person per year and withdraw the money any time with no taxes on earnings, meaning a family of four could invest up to $30,000 and pay no taxes on anything they earned. Critics say this would eliminate taxes on the savings and investments of most Americans at a time when the federal deficit is ballooning out of control.

Business groups criticized the plan for removing the incentive for employers to provide savings plans, such as 401(k) plans. The White House claimed to have been taken by surprise by the far-reaching implications of the plan, the Washington Post reported.

So the Treasury Department has taken another look at the plan. Quoting lobbyists familiar with the plans, the Post reported that Treasury will cut the annual contribution limits on the proposed Lifetime Savings Accounts and Retirement Savings Accounts to $5,000 per person, responding to the criticism of its scale. The Retirement Savings Accounts would replace traditional individual retirement accounts, which offer upfront tax deductions. Income would be taxed before being deposited into the new accounts, but gains would accrue tax free and no taxes would be paid on withdrawals, the Post said.

Treasury has also addressed the concerns about small business retirement plans by cutting the individual limit to $5,000, rather than $7,500. The department also is looking to help low-income savers by giving them a tax credit for each dollar saved in the new accounts, the Post reported. The size of the credit has not yet been determined.

Liberal groups still derided the plan, saying it is another gift to the wealthy and will only hurt the federal bottom line in the long run. "Amazingly, the lobbying is going on mainly from Treasury to the industry guys to rally the troops," a senior Senate tax aide told the Post. Referring to the coming election year and rising concerns about the burgeoning federal budget deficit, the aide said, "I think this is going to be a very difficult year to sell this or any more tax cuts."